NPA Resolution in India: IBC, SARFAESI, DRT and One-Time Settlement

The NPA Challenge in Indian Banking

Non-Performing Assets (NPAs) have been a persistent challenge for the Indian banking sector, with gross NPAs of scheduled commercial banks running into lakhs of crores. The resolution of NPAs is critical not only for the health of individual banks but for the overall stability of the financial system and the availability of credit for productive economic activity.

India’s NPA resolution framework comprises multiple mechanisms, each suited to different types and sizes of distressed assets.

Insolvency and Bankruptcy Code (IBC), 2016

The IBC represents the most comprehensive reform in India’s insolvency framework. It provides for time-bound resolution of corporate insolvency through a Committee of Creditors (CoC)-driven process, with a maximum timeline of 330 days. The IBC has been effective in resolving large NPAs, with recovery rates varying from 15% to 45% of admitted claims depending on the case.

SARFAESI Act, 2002

SARFAESI provides secured creditors with the power to enforce security interest without court intervention. It is particularly effective for secured lending where the value of collateral is sufficient to cover the outstanding dues. The Act allows possession and sale of secured assets, management takeover, and debt assignment to asset reconstruction companies.

Debt Recovery Tribunal (DRT)

Established under the Recovery of Debts and Bankruptcy Act, 1993, DRTs adjudicate cases involving debts of ₹20 lakh and above due to banks and financial institutions. DRT proceedings provide a judicial forum for recovery that can be more appropriate than SARFAESI in cases involving disputed debts or unsecured lending.

One-Time Settlement (OTS)

OTS is a negotiated resolution mechanism where the borrower makes a lump-sum payment to settle the outstanding debt at a discount. Banks have specific OTS policies approved by their boards, and the terms vary based on the asset classification, vintage of NPA, and the borrower’s capacity to pay.

Choosing the Right Resolution Mechanism

The choice of NPA resolution mechanism depends on the size of the debt, the nature and value of security, the borrower’s capacity and willingness to pay, and the lender’s strategic priorities. Professional advisory that combines legal expertise with financial analysis is essential for navigating these complex resolution processes effectively.